ap_cgt08

Effect of break-up of marriage - roll-overs

If a spouse divests him/her self of property as part of a divorce settlement, has there been a capital gain event?

The good news! The assets can be rolled over!

So what kind of marriage break-ups qualify for the same-asset roll-over?

So the capital gains tax events are disregarded, but what are the other consequences?

What did the assets cost the spouse who received them as part of the settlement?

What if the assets are deemed to have been created when the settlement was arranged?

What if there is a family trust or company involved?

A worked example

If a spouse divests him/her self of property as part of a divorce settlement, has there been a capital gain event?

The parties get a divorce and under its terms, property that had been owned by the husband is given to the spouse.

Is the husband liable to capital gains tax on any net gains that have been made on the property between the time it was acquired and the time it was 'given' to the wife?

The answer is yes and no!

The good news! The assets can be rolled over!

Section 126 - 1 allows the asset to be transferred to the new owner without attracting any of the consequences that would normal follow under the capital gains provisions. The capital gain is disregarded in what is referred to as a same-asset roll-over event.

A same-asset roll-over event allows a capital gain or loss an entity makes from disposing of a CGT asset to, or creating a CGT asset in, another entity to be disregarded. For a disposal, certain attributes of the asset are transferred to the receiving entity.

So what kind of marriage break-ups qualify for the same-asset roll-over?

Section 126-5 says the following arrangements attract the roll-over benefits

(a) a court order under the Family Law Act 1975 or a corresponding foreign law; or

(b) a maintenance agreement approved by a court under section 87 of that Act or a corresponding agreement approved by a court under a corresponding foreign law; or

So the capital gains tax events are disregarded, but what are the other consequences?

Section 126-5 (4) that a capital gain or a capital loss made by the person who has to give up the asset to the former spouse is disregarded.

But what happens if the ex-spouse who received the asset as part of the marriage break-up settlement disposes of the asset?

It all depends when the asset was first acquired

(Does the date 20 September 1985 ring any bells?)

We will refer the ex spouse who had to give up the asset as the transferor and the ex spouse who received the asset as the transferee.

If the asset was acquired after 20 September 1985

Section 126-5 (5) says the cost base of the asset in the transferee's hands is the asset’s cost base (in the hands of the transferor) at the time it changed hands (in other words, when the transferee acquired it)

Example: Your spouse transfers land to you because of a court order under the Family Law Act 1975. Any capital gain or loss your spouse makes is disregarded.

If the land’s cost base at the time you acquired it is $10,000, the first element of the land’s cost base in your hands becomes $10,000.

Note: There are special indexation rules for roll-overs: see Division 114.

If the asset was acquired BEFORE 20 September 1985

Section 126-5 (6) says the transferee is taken to have acquired it BEFORE 20 September 1985 (In other words any capital gain or loss you make is generally disregarded: see Division 104. This exemption is removed in some situations: see Division 149.)

What if the assets are deemed to have been created when the settlement was arranged?

Do you remember those events that arose when an asset was created? It will be worth your while to have a look at them if you don't.

In such cases, the asset had no cost because it was generally created out of thin air, so the cost base of the asset is usually taken to be the incidental costs. For example, event D1 deals with …

D1 Creating contractual or other rights

CGT events
Event number and description	Time of event is:	Capital gain is:	Capital loss is:
D1 Creating contractual or other rights [See section 104-35]	when contract is entered into or right is created	capital proceeds from creating right less incidental costs of creating it	incidental costs of creating right less capital proceeds

The table provided by section 126-5 (8), provides you with all the details as to what the cost base will be for each 'creation' event.

Creation case
Event No.	Description of event	Applicable amount
D1	You create a contractual right or other legal or equitable right in another entity eg.You enter into a contract with the purchaser of your business not to operate a similar business in the same town. The contract states that $20,000 was paid for this.	the incidental costs the transferor incurred that relate to the trigger event
D2	You grant an option to an entity, or renew or extend an option you had granted.	the expenditure the transferor incurred to grant the option
D3	Granting a right to income from mining	the expenditure the transferor incurred to grant the right
F1	Lessor grants, renews or extends a lease.	the expenditure the transferor incurred on the grant, renewal or extension of the lease

The expenditure can include giving property: see section 103-5.

What if there is a family trust or company involved?

Section 126-15 deals with situations such as when an individual owns all the shares in a company. The company owns land. The individual’s marriage breaks down. The Family Court orders that the company transfer the land it owns to the individual’s spouse. The individual later sells the shares.

In such as case section 126-15 (3) says the cost base assets are reduced by an amount that reasonably reflects the fall in its market value because of the trigger event. The reduction occurs at the time of the trigger event.

Section 126-15 (4) says that if the entity owning the other asset is also the transferee, the cost base of the other asset are then increased by any amount that is included in the entity’s assessable income for any income year because of the trigger event.

A worked example

Let's take an example from the Commissioner's booklet on capital gains tax to put all this in perspective

A couple jointly own the following assets immediately before their divorce.

The family home	purchased June 1984	cost $80,000
furniture	purchased June-December 1984	cost $20,000
holiday home	purchased December 1985	cost $65,000
shares in a company	purchased march 1986	cost $25,000

On their divorce in July 1987 the family court approves the couple's voluntary agreement in respect of the assets.

The wife receives the family home and the furniture.

The family home	purchased June 1984	cost $80,000
furniture	purchased June-December 1984	cost $20,000

The wife acquired her share of the jointly owned house before 19/9/85, and the remaining share, transferred to her by her spouse, is deemed to have been acquired by her before 19/8/85, because she spouse acquired before then.

So even if the wife used the house to produce the income, or the value of the furniture was more than $5000, she will be exempt from capital gains tax

The husband receives the holiday home (it does not become his residence) and the shares

holiday home	purchased December 1985	cost $65,000
shares in a company	purchased march 1986	cost $25,000

There is not capital gains tax payable on the transfer of the wife's share of the holiday house or the shares on finalisation of the divorce.

The husband will be taken to have acquired the wife's shares of the holiday home and shares ...

at the time of transfer,

for their relevant cost bases.

In effect, he will be taken to have acquired the whole of the holiday house for $65,000 in December 1985, and the whole of the shares for $25,000 in march 1986.

Any capital gain or loss made on the assets at the time the husband disposes will be calculated as if he had purchased them for those amounts, at the time the couple purchased them.